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Sunday, July 19, 2015

The official European Union Anthem is the final choral movement of Beethoven’s Ninth Symphony, based on Schiller’s poem ‘An die Freude’ (‘Ode to Joy’, although the original version apparently had ‘freedom’ instead of ‘joy,’ which Schiller later deleted as too hot a political potato for his day).

On July 12, Paul Krugman in his NYT blog came out strongly in support of the #Thisisacoup camp:

This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief…

Who will ever trust Germany’s good intentions after this? …

The European project — a project I have always praised and supported — has just been dealt a terrible, perhaps fatal blow. And whatever you think of Syriza, or Greece, it wasn’t the Greeks who did it.

Official German circles and their lackeys (I hate to use such a loaded word from communist propaganda days, but it really seems appropriate) did not waste any time in riposting with a character assassination, by Nikolaus Piper in the Süddeutsche Zeitung on July 13. Under the section link “Paul Krugman--Economist foaming at the mouth,” Piper describes Krugman as joining the hashtag campaign of “Germany haters” (Germany being only one of his many pet targets, but currently his favorite), a “hyper-Keynesian” who thinks that new debt, low interest rates and government spending are always the answer to all problems, and that austerity is always false. He insinuates that Krugman’s Nobel Prize for his work in trade theory (actually trade and economic geography) is a questionable qualification for him to pontificate about fiscal (actually macroeconomic) policy while he blithely ignores facts, but Piper fails to mention Krugman’s work on exchange rates and currency crises and his publications on macro policy in a liquidity trap (e.g., Japan in the 90s) and, indeed, bailouts vs. write-downs. He ends with a recital of obscure Baltic politicians and playwrights with even lesser economic qualifications who have also felt an urgent need to defame Krugman. In other words, this is a complete hatchet job based on willful ignorance of the background of someone eminently qualified to comment on the Greek debt crisis (whether you agree with him or not), certainly light-years more qualified than Piper himself (who we are told on his SZ profile has written an award-winning children’s book on economics, among other things). The only invectives missing are “Keynesian running dog” and, of course, “spearhead of the world Jewish conspiracy against Germany,” but then, the Süddeutsche Zeitung is an honorable newspaper and has a reputation to uphold as a liberal paper of record that even republishes excerpts from the New York Times once a week. Strangely enough, the very same Nikolaus Piper conducted a rather favorable interview with Krugman in 2010, praising (if somewhat tongue-in-cheek) the very hang to polemic he now so roundly denounces in him. Is he not only a lackey of the German finance ministry but also suffering from unrequited love?

Is the hitherto respectable Süddeutsche Zeitung in danger of becoming the new Der Stürmer?

certainly not someone who “thinks that new debt, low interest rates and government spending are always the answer to all problems,” as a careful reading of his blogs would have made clear (e.g., his recent blog on Canada’s experience with austerity and why it differs from Greece’s).

SPIEGEL: The American economist Paul Krugman has a clear position on that. The new aid program for Greece, he wrote in a recent column [actually in his blog, GS] in the New York Times, is "pure vindictiveness" and a "complete destruction of national sovereignty." Do you share his view?

Schäuble: Krugman is a prominent economist who won a Nobel Prize for his trade theory. But he has no idea about the architecture and foundation of the European currency union. In contrast to the United States, there is no central government in Europe and all 19 members of the euro zone must come to an agreement. It appears Mr. Krugman is unaware of that.

Schäuble thus repeats Piper’s mischaracterization of Krugman’s Nobel award and the insinuation that he is not qualified to judge these issues. Whether Piper is reading from Schäuble’s playbook, or vice versa, is hard to say, but this cannot be a coincidence. Would Schäuble’s perusing Krugman’s seminal 1988 paper “Financing vs. Forgiving a Debt Overhang” (Journal of Development Economics 29: 253-268) change his opinion about Krugman’s qualifications to comment on the Greek debt crisis in any way (on the unlikely assumption that Dr. Schäuble could even make heads or tails of it)?

And that Krugman might be oblivious of the cumbersome governance structure of the Eurozone also seems highly unlikely, besides being largely irrelevant. After all, who in the world today isn’t painfully aware of this deficiency after being subjugated to this excruciating five-year reenactment of The Exterminating Angel?

But we needn't take the word of a benighted American to judge whether there isn’t some justification in the #Thisisacoup accusations. Paul De Grauwe, former member of the Belgian Parliament, emeritus professor at the Catholic University of Leuven, currently professor at the London School of Economics, and one of the world’s leading experts on currency zones, is someone no-one could accuse of being unacquainted with the Eurozone’s architecture (or being a foaming-at-the-mouth “hyper-Keynesian,” for that matter). Yet in his blog on June 17, two weeks before the Guns of Navarone were fired or #Thisisacoup took off, he wrote:

All this teaches us two lessons. First, the objectives of the creditor nations, including the ECB, that today add tough conditions for their liquidity support is not to make Greece solvent but to punish it for misbehavior. … But it is precisely the desire to punish Greece by imposing additional austerity that makes it so difficult for Greece to start growing again and to extricate itself from the bad equilibrium.

A second lesson concerns the credibility of the future use of OMT. It clearly appears from the Greek experience that the willingness of the ECB to use the OMT program is very circumscribed. It is circumscribed by the ECB’s desire to solve a moral hazard problem … Behind the gloves of OMT is hidden a big stick. It is doubtful that future governments that experience payment difficulties will accept to be beaten up first before they can enjoy the OMT liquidity support. [my emphases]

Thus De Grauwe only lends further support to Krugman’s “this goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief” critique, well before one could even speak of a “coup.”

Why is the German finance minister so sensitive to these criticisms that he seems almost overeager to resurrect the role of the “ugly German” (in the words of one German opposition parliamentarian)? The Oxford macroeconomist Simon Wren-Lewis has a plausible answer (and it’s not that Dr. Schäuble is a covert Nazi or auditioning for the role of Dr. Strangelove):

What is driving Germany’s desperate need to rid itself of the Greek problem?

One possible answer is that Germany finds the truth about Greece too upsetting, too challenging. This is because since 2010 Greece has done most of what the Troika asked of it. In particular, changes in its government’s underlying primary budget balance (i.e. the degree of austerity enacted) have been greater, by a long distance, than any other European economy. For many outside Germany what has happened to Greece as a result is hardly surprising: austerity is contractionary, and austerity on steroids is ruinous. Yet Germany is a country where the ideas of Keynes, and therefore mainstream macroeconomics in the rest of the world, are considered profoundly wrong and are described as ‘Anglo-Saxon economics’. Greece then becomes a kind of experiment to see which is right: the German view, or ‘Anglo-Saxon economics’.

The results of the experiment are not to Germany’s liking. Just as ‘Anglo-Saxon economics’ would have predicted, the results for Greece under the Troika have been a disaster. After dutifully taking the medicine for years, and seeing the collapse of their economy, finally the Greek people could take no more. Confronting this reality has been too much for Germany. So instead it has created its fantasy, a fantasy that allows it to cast its failed experiment to one side, blaming the character of the patient.

Wren-Lewis fails to mention that the Merkel government is also being very much driven, like the Sorcerer’s Apprentice, by the public opinion it whipped up in the past about “those lazy Greeks,” and by the rise of Germany’s own anti-Euro and xenophobic movements like Alternative für Deutschland and Pegida.

Paul Krugman, as the most visible, vocal and dangerous (what with his flashy Nobel Prize) exponent of this ‘Anglo-Saxon economics’ (read ‘hyper-Keynesianism’), is the obvious policy-wonk Prügelknabe (read ‘whipping boy’) for so many reasons I cannot even begin to enumerate them here. One is perfectly within one’s rights to disagree with him, but then one should marshal legitimate arguments rather than revert to a sorry tradition of character assassination and defamation.

While the campaign against Krugman does seem to have aspects of ‘reopening the hunting season,’ the perpetrators have been very careful to avoid any overt anti-Semitism (it is of course no secret that Krugman is Jewish). However, anyone intimately familiar with German sensitivities cannot help but recognize that Piper’s article is skating dangerously close to this kind of historical stereotyping, particularly by using the term “Hasskampagne gegen Deutschland” (“hate campaign against Germany”). I won’t even speculate on who is responsible for the Stürmer-like “Volkswirt mit Schaum vor dem Mund” (“economist foaming at the mouth”), which was carefully placed outside the body of Piper’s article (and thus cannot be directly attributed to him) but in a prominent position on the webpage, and appears as the article’s actual title—which it is not—in Google searches.

Thank you for your comment, which is indicative of public opinion in Germany today, but unfortunately reflects many delusions.

If you had read my previous post, you would know my recommendation to Germany if it is unhappy in its current role of creditor. I'll give the full quote here, which is Polonius's counsel to his son Laertes:

Neither a borrower nor a lender be,For loan oft loses both itself and friend,And borrowing dulls the edge of husbandry.

Hamlet Act 1, scene 3, 75–77

As long as Germany continues to run a current-account surplus (now 7.5% of GDP) it will remain a lender, call this competitiveness or not!

Many Germans think the hundreds of billions of bailout funds are some kind of "gift" ("Gabe", in Mauss's terminology) to Greece, out of solidarity as Merkel claimed in her Bundestag speech, but nothing could be further from the truth. The Greek bailouts are nothing like the Solidaritätszuschlag that West German taxpayers paid (and still pay!) to finance East Germany after reunification. These were indeed a gift or net financial transfer. Of the enormous Greek bailout funds only 11% went directly to Greece to finance economic activity there. The rest simply circulates between the ECB in Frankfurt, the IMF in Washington, and the various Eurogroup creditor treasuries to roll over previous debt and postpone the unpleasant truth that this debt will eventually have to be written down. That is, it is just a creditor shell game to deceive taxpayers, while interest accumulates to Greek taxpayers and their country is--unnecessarily and counterproductively--forced into recession in the hope that Greeks can then make a net financial transfer back to the creditors! This is called squeezing blood from a stone.

The problem for the average taxpayer is understanding the difference between gross and net flows (brutto bzw. netto). On a gross basis this looks like an enormous gift; on a net basis it is practically nothing and counterproductive.

What many people also don't understand was that the first Greek bailout (2010) was actually a bailout of German and French private banks (Deutsche Bank, BNP Paribas, etc.). Since direct bank bailouts at that time were politically unpopular (remember HRE, Commerzbank?), they decided to call it a "Greek" bailout. This simply meant moving the banks' Greek bonds from their balance sheets to public balance sheets, i.e., taxpayers assumed the full risk. The banks profited from this operation enormously, the Greeks not at all. The IMF recognized that this was unsustainable, but was coerced into giving its seal of approval because of the risk of a Lehman-like financial panic. Thus some economists say Greece was really just sacrificed, "thrown under a bus", to save the European banking system.

But since Greek debt was already unsustainable in 2010 ("Zinsknechtschaft", or debt bondage, and it's irrelevant whether the creditors are private banks or public institutions), the crisis resumed in 2012. A private-sector haircut (PSI) was then imposed on the remaining private creditors (die deutschen und französischen Banken waren schon aus dem Schneider!). But 80% of these creditors were Greek and Cypriote institutions, forcing Cyprus into bankruptcy, Greek pension funds into a fiscal crisis, and Greek banks again had to be recapitalized by the ECB.

I could go on, but you get the point. This is just a futile carrousel of denial to properly restructure Greek debt, but not a "gift" or financial transfer from German taxpayers to Greece at all. The Greeks have just been made poorer by the whole circus (not that their government before 2009 does not bear considerable responsibility for the mess).

However, in the event of Grexit, which Wolfgang Schäuble seems to prefer, German taxpayers will be finally hit with an enormous bill. The chickens will have finally come home to roost.

My 'praise' of the Welt article was supposed to be sarcastic. My fault it did not come across like that. Difficult to express irony in a foreign language...My 'praise' of the Welt article was supposed to be sarcastic. My fault it did not come across. Sorry for that. Difficult to express irony in a foreign language...

I wanted to highlight the article because as you say it is indeed indicative of German opinion (perhaps I should say sentiment) and in that respect even more telling than the Soll piece in the NYT. The Welt author addresses the rift in international and national perception. And he comes up with the rather comfortable explanation: 'We're the good ones therefore they don't like us.' Now, that's a strategy to insulate against criticism! (I really like that he makes a detour to a French anthropologist. This is not Bild after all ;-)

Take that inward-looking sentiment, a broad denial or ignorance of the facts you mention in your response, a reluctant but then again also brutal hegemon and politicians who want to kick the can further down the road they started in 2010 - I do not see how under current conditions the dysfunctionally structured Eurozone can be reformed in a democratic way. The chickens will come home to roost in one way or another. On the one hand sarcasm is not appropriate in this toxic environment, on the other hand it clearly is. Ach Europa!

You're right - I missed your sarcasm. Probably comes from overindulging in sarcasm myself. But either way, you did succeed in raising an important question about German self-delusion in the creditor role.

The distinction between loans, grants, and debt rollovers and writedowns is an important but often subtle one. Even the experts are at loggerheads about whether Greek debt is/was unsustainable now, in 2012, and 2010, and what should be done about it. But German public opinion has become much too self-righteous to attend to such distinctions, and suffers from the delusion that Greece has been given hundreds of billions of financial grants at their expense.

About Me

I'm a research economist at UNU-MERIT (Maastricht, The Netherlands) and IIASA (Laxenburg, Austria) with a specialization in the economics of innovation, complex dynamics, economic growth and evolutionary economics. By the 2008 world crisis at the latest it became clear that macroeconomics, financial markets and economic policy cannot be entrusted anymore to mainstream economists. Hence this blog.